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The security market line is defined as a positively sloped straight line that displays the relationship between the: expected return and beta of either a security or a portfolio.
Is the security market line upwardly sloping?
- The security market line is a positively slanted line that illustrates the relationship between expected return and beta. The market risk premium is represented by the slope of the line [E(Rm) - Rf]. A market portfolio is made up of all of these assets in a well-functioning market, so all of them must plot on the SML.
- The slope of the security market line represents the market risk premium, i.e., the excess return over the market return. The market risk premium compensates for the security's additional systematic risk.
- The slope of the SML, which is the difference between a market portfolio's expected return and the risk-free rate. In other words, it is the expected return on investment for a portfolio with a beta of 1. The SML equation illustrating the relationship between expected return and beta.
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